Income Statements and Firm Performance: Variable and AbsorptionCostingJellison Company had the following operating data for its first two years of operations: Variable costs per unit:Direct materials 4.00Direct labor $2.90Variable overhead 1.50Fixed costs per year:Overhead 180,000Selling and administrative 70,350 Jellison produced 90,000 units in the first year and sold 80,000. In the second year, it pro-duced 80,000 units and sold 90,000 units. The selling price per unit each year was $12. Jellison uses an actual costing system for product costing.Required:1. Prepare income statements for both years using absorption costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?2. Prepare income statements for both years using variable costing. Has firm performance, asmeasured by income, improved or declined from Year 1 to Year 2?3. Which method do you think most accurately measures firm performance? Why?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Income Statements and Firm Performance: Variable and Absorption
Costing
Jellison Company had the following operating data for its first two years of operations:
Variable costs per unit:
Direct materials 4.00
Direct labor $2.90
Variable
Fixed costs per year:
Overhead 180,000
Selling and administrative 70,350
Jellison produced 90,000 units in the first year and sold 80,000. In the second year, it pro-
duced 80,000 units and sold 90,000 units. The selling price per unit each year was $12. Jellison
uses an actual costing system for product costing.
Required:
1. Prepare income statements for both years using absorption costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?
2. Prepare income statements for both years using variable costing. Has firm performance, as
measured by income, improved or declined from Year 1 to Year 2?
3. Which method do you think most accurately measures firm performance? Why?
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